Does Microcredit Reduce Poverty?

(A Real Time Bangladesh Blog Report, March 2011)

This blog summarize the finding of a seminal paper ‘Khandker Study’- possibly the most cited paper on the topic- titled Fighting Poverty With Microcredit : Experience in Bangladesh by Khandker and Shahidur Rahman, Publisher : World Bank, ISBN no : 019521121. This is a 100+ page paper. Here I will try to quote the highlights. The study indeed claims it works!

The study was conducted jointly by Bangladesh Institute of Development Studies (BIDS) and World Bank. It studied three microcredit programs including Grameen and BRAC. The survey selected 1740 households from 87 villages from 29 thanas. To help proper comparison- the study included (control group) households which did not participate in a credit program.  To minimize various possible biases- it carefully used various randomization measures to select the thanas, villages and households.  The survey measured the condition of the villages and households three times during the 1991/92 farming year, based on the three cropping seasons: Aman mousum (November-February)- this is the time of relative abundance in villages, Boro mousom (March-June), and Aus mousum (July-October)- this the economically worse off or lean seasons.  Here are some key aspects of its findings:

One of the key indicators of any potential long term economic improvement of a household- if any is the net-worth of the individual and ability to increase expenditure. The study reports (Page-47):

“Borrowing did indeed increase the household net worth of borrowers in all three programs... A 10 (ten) percent increase in borrowing from BRAC increased household net worth 0.09 percent for female borrowing and 0.20 percent for male borrowing. A 10 percent increase in male borrowing from RD-12 increased household net worth 0.22 percent; female borrowing from RD-12 had no effect on household net worth. The increase in household net worth due to borrowing from Grameen Bank was about same for female (0.14 percent) and male (0.15 percent) borrowing. ”

On Per Capita Expenditure: (Page 46):

“The most important effect of borrowing from a microcredit program is its impact on per capita expenditure.  As the regression results show, the effect of borrowing was positive for each category of credit from each program (table A3.2). A 10 percent increase in women's borrowing increased household per capita weekly expenditure by 0.43 percent for  Grameen Bank, 0.39 percent for BRAC, and 0.40 percent for RD-12 (see table A3.2). For all three microfinance programs, the impact on consumption of borrowing by women was about twice as great as it was for borrowing by men”.

Interestingly, a microcredit program can have other social benefits. Indeed it is quite possible that a subsidized microcredit program may not have the direct goal of poverty elimination at all. Rather it can aim improving living standard, hygiene, children schooling, nutrition etc. The report states its findings Children's schooling:

 “Microcredit had a significant impact on children's schooling, especially for boys. At the mean, a 1 percent increase in Grameen Bank [statistically most significant] credit provided to women increased the probability of school enrollment by 1.9 percent for girls and 2.4 percent for boys.”

It also has been found to increase children's nutrition. It reports:

“Women's credit had a large and statistically significant impact on two of three measures [of chidren’s nutrition- body mass index, height for age, and arm circumference] of the nutritional well-being of both male and female children (table A3.4). Credit provided to men had no statistically significant impact except for girls' body mass index where a 10 percent increase in male credit increased girls' body mass index about 3 percent.  A 10 percent increase in credit provided to women increased the arm circumference of girls by 6 percent. Female credit also had significant positive effects on the height-for-age of both boys and girls.”

Finally, the overarching question does availability of microcredit eliminates poverty? The study measured those based on various established indicators of poverty levels. Does it help a family to climb out of poverty? It writes on households (Page 56):

“ [At the household level]…. that 5 percent of Grameen Bank household rose above poverty each year by borrowing from Grameen Bank. Similarly, 3 percent of BRAC households and 6 percent of RD-12 households rose from poverty each year”.

It also tried to measure the impact of poverty level of a village with microcredit program. It reports (page 57):

“[at village level] All three microcredit programs reduced both moderate and extreme poverty (table A3.7). Aggregate village-level moderate poverty was 14 percent lower in RD-12 villages, 12 percent lower in Grameen Bank villages, and 10 percent lower in BRAC village.”

The actual paper is more than 100 pages and provides substantial additional details about the data, the data analysis method to arrive at these conclusions and findings, statistical measures of confidence and significance. It also tries to compare impacts due to male and female borrowing.

Subsequent Criticisms &  Refinements

A massive volume of research now exists after this paper which re estimates the findings.  Some validates the assertion of this first article- while some claims the impact is somewhat lesser. In a 2007 article, Emran, Morshed and Stiglitz in 2007 summarizes: the state:

 “There is now a voluminous literature analyzing different aspects of the microfinance revolution that swept across the developing world in last thirty years (for a recent survey, see Aghion and Morduch, 2005)”.

Most critical of the researchers has argued about the rigorousness of the supporting findings and asserted that perhaps it works in a limited scope than was originally claimed. For example in this articleIn this 2007 article Ahlin writes: Dr. David Hulm analyzes that it may not work outside of Bangladesh and it may not work for the extreme poor.

 “Despite its advances, many questions about micro-credit remain unanswered. An obvious and important one – does it work? – still seems to elude a definitive answer.”

As late of last week on January 27, 2011,  a new extensive survey result (performed in a modern version of Khandker’s extensive style) has been published by Sajjad Zahir which based on again extensive field data provides evidence that indeed in Bangladesh a huge number of microcredit borrowers has reduced their poverty level. However, from scientific point of view- the study is not exact answer. It does not establish the causal relationship i.e. study what happened to people in the same time who did not use microcredit.

Yet, it is important to understand, that as of 2008 there is no authoritative paper that would confirm it does not work.

Smoke Screen & Hyperbole

Readers genuinely interested in understanding the current debate about Grameen bank should find it extremely useful. Yes, the study has its weaknesses- like any other scientific studies. Analysis of the same data-set acquired by these researchers by a little different standard might lead to slightly different conclusions. It only measured a limited number of parameters.

A young researcher, person genuinely interested in poverty elimination today can take on studying other factors such as impact on living standard, healthy food habit, sanitation. Indeed, -years have passed since then and today more longitudinal data is available. Also, the micro-credit programs are quite different today, and may no longer work exactly in the same way, and these findings may not be valid anymore.

It is ironic that few articles-which can not make their basic facts right are also adding confusion. Read this blog - More on Grameen Circus to learn more about such articles.

One thing is constant- scientific integrity requires objectivity and hard work. If a different conclusion are to be made that also should be supported by similar data and objective analysis. Just emotion, journalistic hyperbole, and personal invectives will only create smoke screen and help those who want to perpetuate the poverty in Bangladesh.